Monday, December 4, 2017

Was That Vol We Saw?

Monday,
December 4, 2017 - U.S. equities were whipsawed this past week by optimism sparked
by tax reform progress in the Senate and fears conjured up by former National
Security Advisor Michael Flynn's guilty plea in cooperation with Special
Counsel Robert Muller's probe. The markets began the week with all eyes fixated
on Washington, as investors awaited the Senate's impending vote on its version
of the tax reform bill. Passage of the bill in the Senate Budget Committee on
Tuesday and the newfound backing of several GOP holdouts on Thursday injected
optimism into the markets and fueled gains. Positive tax reform developments in
conjunction with an encouraging Fed Chair confirmation hearing for Jerome
Powell, robust tech earnings, extension of OPEC production cuts, upward revision
of U.S. Q3 GDP, rising October consumer spending, 17 year high consumer
confidence reading and other upbeat economic data releases helped catapult
equities to record highs through Thursday. Stocks appeared to be heading up
towards an uninterrupted week of gains, as all 11 S&P 500 sectors rose on
Thursday and the DJIA hit its fifth thousand-point milestone, after surging 330
points to close above 24,000 for the first time.

However, the markets hit a snag on Friday with the news of deficit
hawks and other wavering GOP senators impeding tax reform progress and most
importantly, the sudden announcement of Flynn's guilty plea and cooperation
with the special counsel's inquiry into Russian election interference. These
abrupt, ominous developments unleashed one of the most volatile trading days of
the year, as the Dow registered its widest trading range since Brexit, gold and
government bond prices spiked and the VIX shot up nearly 30% at one point
during the day. Despite this bout of political uncertainty, the major indexes
were able to pare their losses and remained in record territory following news
of a compromise in the Senate tax push and the continued allure of a
brightening global economic outlook. At the close of the week, the DJIA,
S&P 500 and Russell 2000 all registered gains at 2.9%, 1.5%, and 1.2%
respectively, while the Nasdaq decline 0.6%.

Expect this week's volatility to continue as the intensifying
Mueller probe casts a pall over the markets and Congress has to hastily
reconcile two competing tax bills from the House and Senate.

ETFG
Quant- The leaders and laggards of this week's ETFG Quant
rankings are closely tied to the trajectory of progress in this week's tax
reform push. Several of our top rated funds are currently financial-oriented
products. A tax overhaul is expected to particularly benefit financials, as it
will raise their net-interest margins and lower their effective tax rate, which
is currently one of the highest of the major S&P 500 sectors. Funds
including the First Trust Nasdaq Bank ETF (FTXO), SPDR S&P
Insurance ETF (KIE), and Fidelity MSCI Financials Index ETF (FNCL)
experienced large gains in their ETFG Quant scores. FTXO is currently the 8th
highest rated ETF according to our model and KIE and FNCL received the 6th
and 9th largest weekly Quant score gains. Other perceived
beneficiaries of a tax overhaul, like the Guggenheim S&P Small Cap 600
Pure Growth ETF (RZG) and SPDR S&P 600 Small Cap Growth ETF (SLYG),
were among our top Quant gainers this week.

Conversely, ETPs representing sectors that will be adversely
impacted by the proposed tax overhaul heavily populated this week's top quant
losers. ETPs that have heavy exposure to minimum volatility, safe
haven/dividend proxy, and multinational stocks were among the top losers this
week. Among these ETPs were the iShares Edge MSCI Min Vol USA ETF (USMV),
Schwab US Dividend Equity ETF (SCHD), Vanguard Utilities ETF (VPU),
and SPDR S&P Technology Hardware ETF (XTH).

Assumptions,
opinions and estimates constitute our judgment as of the date of this material
and are subject to change without notice.
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